Summary and implications
The London Stock Exchange has announced the creation of a fourth listing option on its London stock exchanges. Complementing the existing listing options of a premium or standard listing on the main market or a listing on AIM, the High Growth Segment offers a fourth option for fast growing companies which have aspirations to a future full (premium) listing in London and want something more than an AIM listing but less than a full listing.
The development of this new segment is a response to the ever-increasing number of high growth companies, particularly technology companies, which are perceived as shunning the UK markets in favour of the likes of NASDAQ.
The High Growth Segment represents a hybrid listing option between companies whose securities are listed on the Official List and admitted to trading on the London Stock Exchange's main market and those listed on AIM. While AIM is a completely separate market, the High Growth Segment is technically a part of the main market. The only difference to other companies whose shares are traded on the main market is that they are not fully listed (see further below). The rules for the High Growth Segment borrow heavily from the AIM Rules for Companies and also draw on the Listing Rules which apply to companies on the main market.
Why join the High Growth Segment?
The High Growth Segment is designed to offer companies the option of having their securities listed and traded on London's main securities market, with anticipated greater access to capital on an ongoing basis through a diverse and deep investor pool, the ability to use securities as acquisition currency, and access to an expert advisory community to help gain profile. At the same time, the High Growth Segment is intended to offer a less burdensome regulatory environment for fast growing companies without damaging investor confidence in the market.
With a reduced free float requirement, founder shareholders and venture capital and private equity investors are able to float a smaller percentage of the company at an earlier stage of development as the company transitions from being private to becoming a public company.
Who can join the High Growth Segment?
London Stock Exchange listing options
Premium - highest standard of listing, securities are admitted to the Official List and admitted to trading on the main market for listed securities. This is often referred to as a "full listing" or listing on the "Main Market", "Full Board" or "London Stock Exchange".
Standard - a regulation-lite version of a premium listing with reduced ongoing compliance requirements complying with the minimum EU requirements.
High Growth Segment - a new segment where securities trade alongside premium and standard listed securities but are not listed on the Official List.
AIM - AIM is an exchange regulated market so is not subject to regulatory oversight. It is administered by the London Stock Exchange and compliance is the responsibility of the Exchange and companies' nominated advisers.
There is an important distinction in the listing process for premium and standard listing. To be fully listed, companies' securities must be listed on the Official List administered by the UK Financial Conduct Authority and admitted to trading on a regulated market. London Stock Exchange's main market for listed securities is a regulated market for these purposes. High Growth Segment companies are therefore traded on the regulated market but are not listed on the Official List.
One limitation of the new High Growth Segment is that it is only open to companies incorporated within the EEA, which may limit its attractiveness to some overseas entrepreneurs who want to structure their businesses through more tax efficient jurisdictions such as the BVI or Cayman Islands. For companies which meet this jurisdictional requirement, the key additional requirements are:
- the company must be able to show at least a 20 per cent composite aggregate growth rate (CAGR) in its revenues over a three year period;
- the company must be a trading business owning the majority of its assets;
- following listing, there needs to be a minimum 10 per cent free float;
- the free float needs to have a value of at least Â£30m (the majority of which should be raised on listing); and
- the free float needs to be sufficient to provide an orderly market following listing.
The listing process
As the High Growth Segment is part of the regulated market, applicants are required to produce a prospectus which is approved by the UK's Financial Conduct Authority (FCA) (the successor to the UK Listing Authority). However, as applicants for the High Growth Segment will not be listed on the Official List (and therefore are not eligible for a premium or standard listing), the Listing Rules do not apply and there is no requirement to appoint a sponsor under the Listing Rules. Borrowing from the AIM Rules, applicants for the High Growth Segment will need to appoint what is referred to as a Key Adviser.
The Key Adviser is a firm registered for that purpose by the London Stock Exchange and performs a role which is much the same as a nominated adviser on AIM. The key difference is that, in line with the sponsor regime under the Listing Rules, the Key Adviser role is not an ongoing one and is only required on listing and then subsequently when the company needs guidance on the application of the High Growth Segment Rulebook.
One key additional requirement for inclusion in the company's prospectus is a clear statement of intent to seek to move to a premium listing on the main market and an indication of how the company intends to satisfy the eligibility requirements for that part of the market. In practice, this is likely to be interpreted as requiring a statement of intention to make the change in the future and an indication of what the company will need to achieve before making the move.
Life in the High Growth Segment
Transactions are class tested on four key ratios to determine the relevant percentage ratios:
- Gross assets - gross assets the subject of the transaction divided by the gross assets of the company.
- Profits - profits attributable to the assets the subject of the transaction divided by the profits of the company.
- Consideration - consideration for the transaction as a percentage of the market capitalisation of the company.
- Gross capital - gross capital of the company or business being acquired divided by the gross capital of the company.
The most commonly applied test is the consideration test.
The continuing obligations of companies traded on the High Growth Segment combines aspects of the Listing Rules and the AIM Rules. There are notification requirements for certain transactions which are heavily based on the Listing Rules. However, in common with the AIM Rules, shareholder approval of transactions is only required for those transactions which are so large as to be classed as reverse takeovers (broadly, where the target is larger than the acquiring listed company). The notification requirements apply to:
- "notifiable transactions", where any of the percentage ratios (see box right) for the relevant transaction is 25 per cent or more; and
- "related party transactions", where any of the percentage ratios for the relevant transaction is five per cent or more and the transaction is with a "related party" (broadly, directors, 10 per cent or greater shareholders, persons exercising significant influence over the company, and their respective associates).
There are a number of exclusions, the most commonly applicable being transactions in the ordinary course of business and financing transactions (including equity issues) which do not involve the acquisition or disposal of a fixed asset of the company.
Other matters requiring notification borrow from the Listing Rules and AIM Rules and include:
- changes in directors;
- changes in the issued share capital; and
- decisions to pay dividends or make other payments to shareholders.
In addition to the notification requirements, companies admitted to the High Growth Segment must maintain a website which contains certain key information relating to the company, such as its directors and advisers, its latest published prospectus and financial information and constitutional documents.
Corporate governance is one area of focus for High Growth Segment companies
Corporate governance has been an increasing concern for the UK's regulatory authorities, investor base and the London Stock Exchange. High profile cases of perceived governance issues such as Bumi and ENRC have only added to these concerns.
As a result, companies admitted to the High Growth Segment will need to make a clear statement as to which corporate governance requirements they are subject to or otherwise observing, and to report on their compliance in their annual reports.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.